Q3 ’16 Earnings – For SP 500 Earnings Growth, the Energy Sector Looms Large

While we won’t start to hear most of the energy sector results until the last week of October ’16, Schlumberger (SLB) and Halliburton (HAL) report the week after next.

Exxon (XOM) and Chevron (CVX) both report October 28th, 2016 or the last week of October.

From a “top-down” view of the SP 500, the Energy sector is key to driving SP 500 earnings, since it has (without a doubt), been the sector that has been the biggest drag on the SP 500 since late 2014.

Here is the historical (and projected) Energy sector earnings (first column) and revenue (second column) growth: (source:Thomson Reuters)

  • Q3 ’17: +234%, +27.7% (est)
  • Q2 ’17: +495%, +31.9% (est)
  • Q1 ’17: N/A, +43% (est)
  • Q4 ’16: +2%, +8.3% (est)
  • Q3 ’16: -68.4%, -11.3% (est)
  • ———————————–
  • Q2 ’16:  -85.1%, -24.6%
  • Q1 ’16: -106.7%, -29.6%
  • Q4 ’15: -74.4%, -35.4%
  • Q3 ’15: -57.1%, -35.95%
  • Q2 ’15: -56.4%, -31.7%
  • Q1 ’15: -57.9%, -34.7%
  • Q4 ’14: -21.8%, -13.5%
  • Q3 ’14: +10.3%, -2.6%

Analysis: with crude up near $100 during the 2nd, 3rd quarter of 2014, Energy’s market cap as a percentage of the SP 500 was 12% – 14%. Today, as of early October ’16, Energy’s market cap weight is 7%.

Using this blog post from August 27th, 2016, if readers click would click on and enlarge the spreadsheet, because of the low level of net income for the Energy sector, the top 5 stocks in the sector comprise all the revenue and earnings for the sector, and Exxon remains the big dog in the yard so to speak.

Q3 ’16 is expected to see its best quarter for Energy revenue growth since late ’14.

Q4 ’16 is expected to see it’s first quarter of y/y revenue growth in 8 quarters.

For the sector as a whole, since the above blog post 6 weeks ago, Q4 ’16 Energy sector earnings and revenue expectations have fallen from +5.9% and +11.8%, to +2% and +8.3% today (see above table).

While 3rd quarter earnings are important, I am watching the 4th quarter ’16 earnings and revenue estimate changes.

It is the 4th quarter estimate changes that will be the key tell for the sector (in my opinion).

Given the action in WTI, trading over $50 this past week, and trying to break out, crude’s trading is important.

If WTI does break over $50 and above the June ’16 highs, it would be hard to think Energy under-performs the SP 500.

The Energy weight for clients is between 5% – 10% today, and consists of the IYE, OIH, and XLE.

Thomson Reuters data (by the numbers): 

  • Forward 4-quarter estimate: $129.54. ($129 was my estimate from last week. Close. )
  • P.E ratio: 16.6(x)
  • PEG ratio: 5.7(x)
  • SP 500 earnings yield: 6.01%, on the increase in the forward estimate vs. 5.77% last week.
  • Year-over-year growth of forward estimate: +2.91%, the highest since January ’15 or 21 months ago

With the Columbus Day weekend, will have more blog posts over the long holiday weekend.

Thanks for reading.


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